Your organization just received $10,000 from someone in the community. The funds are definitely reportable as income for your organization but is this a donation or something else entirely? Sometimes it is hard to determine if an amount received by an exempt organization is a charitable donation or an exchange transaction. The following factors may help in making that determination; however, they are not binding under the Internal Revenue Code.
Factors indicating a contribution to an exempt organization include:
- The organization is soliciting the funds to be used for public benefit.
- Payer does not receive significant benefits.
- Payments are generally irrevocable and nonrefundable although they can be restricted for a specific time or purpose.
- Payer indicates a desire to support the organization’s mission and programs.
- Organization has discretionary authority over the delivery of goods or services.
- Amount of the payment is determined by the payer.
Factors indicating an exchange transaction with an exempt organization include:
- The organization is soliciting funds to provide goods, services, facilities, or products that will physically or economically benefit the payer.
- Payer does receive significant benefits.
- Payments may be refundable if the goods and services are not provided or if the payer is not satisfied with the results.
- Payer indicates a wish to receive the services or benefits.
- Payer has discretionary authority over the delivery of the goods or services.
- Amount of the payment is determined by the organization.
Any payments received that are partially a donation and partially an exchange transaction must be segregated and are called “quid pro quo” contributions. Only the portion received which exceeds the value of the goods and services or other substantial benefit can be treated as a charitable donation.
Let’s take a look at what is clearly insignificant. Token benefits are ignored and the entire amount is treated as contribution revenue if the fair market value, or FMV, of the token benefit does not exceed 2% of the payment, not to exceed $107 in 2017 and $108 in 2018. Low-cost articles with the organization’s logo that cost less than $10.70 in 2017 or $10.80 in 2018 (Rev. Proc. 2016-55 and 2018-18) are also considered token gifts as long as the payment received is at least $53.50 in 2017 and $54.00 in 2018.
Example 1: Donation $100 – Donor program determines the donor is eligible to receive a mug with estimated cost of $5.
Since the donation exceeds $54.00 in 2018, the donor can receive a token benefit of $2 (2% of $100 ). However since the mug has the organization’s logo and the cost is less than low-cost article limit of $10.80, the full payment received is considered a donation.
Example 2: Donation $1,500 – Donor program determines the donor is eligible to receive a book with estimated cost of $20.
Since the donation exceeds $54.00 in 2018, the donor can receive a token benefit of $30 (2% of $1,500). If the book’s FMV is only $25, then the total payment received is a donation. The benefit received is less than the token benefit calculation and does not exceed the cap limit of $108 for 2018 so the donation is fully deductible.
Example 3: Donor pays $1,000 to sponsor a table at the annual fundraiser.
They receive four tickets to the event with a FMV of $200 ($50 per ticket). The donation exceeds $54.00 in 2018 so the donor can receive a token benefit of $20 (2% of $1,000). In fact, they receive a benefit of $200, which is considered an exchange transaction so the charitable donation is $800 for the fundraising event. The donor can actively refuse the tickets and receive the full donation of $1,000. They cannot get the full donation by just failing to use the tickets.
When a donor makes a payment to an exempt organization that exceeds $75, it is partly a contribution and partly an exchange transaction. The donee must provide a written disclosure statement in connection with either the solicitation or the receipt of the “quid pro quo” contribution. This statement is not required for items meeting the “token exception” mentioned earlier. The statement must disclose that the contribution deductible for federal income tax purposes is limited to the excess of money or FMV of property donated over the value of goods and services received by the donor. The statement must also include a good-faith estimate of the FMV of goods or services. Failure to meet the written disclosure requirement could result in an IRS penalty of $10 per contribution. The maximum penalty is limited to $5,000 per fundraising event or mailing.
These rules are not new, but sometimes we need a reminder of what constitutes a donation versus an exchange transaction. Check with your tax advisor or contact PBMares with any questions.